The Present and Future of the Hedge Fund Industry
2016 was a phenomenal year for the hedge fund industry. There has been a lot of chatter among hedge fund managers and investors about the industry. Some financial analysts think 2017 will bring more chatter and clatter as major changes are more likely to happen. World-renowned financial advisory services firms like KPMG, EY, PwC, and Deloitte have researched and produced reports to highlight the key developments in the hedge fund industry. Among the many highlights made, the following three issues reflect the changes happening in the hedge fund industry today.
1. Increased rotation of assets
Over the past few years, many hedge fund managers have been faced with the challenge of declining performance of asset classes. However, not all managers performed poorly probably due to having different strategies.
Most of the hedge fund managers with poorly performing assets are experiencing investor withdrawals. Some may be forced to close down. This scenario is resulting to re-circulation of assets within the industry. Some investors are reinvesting with better-performing managers, while others are seeking new strategies that resonate with current market valuations and economic forecasts. This means many investors will also be considering repositioning their portfolios.
There’s an increasing interest in other assets such as pension funds. Many hedge fund managers are considering pension plans as a good opportunity for growth. In addition to this increased interest, there is more pressure from the pension funds side. Many pension funds are out of options investment-wise and are considering other types of investments. Coincidentally, hedge funds are a great option for pension funds.
2. Globalization and its implications
Globalization is a current trend in all industries in the financial sector. New markets, investors, and competitors from different parts of the world are venturing into the hedge fund industry. This is a trend that no manager would dare to ignore. As more hedge fund leaders go global, the asset managers are busy working out how to cope up with the operational, tax, and regulatory challenges presented by globalization. For investors, globalization has caused more good than bad. They have a larger number of managers to choose from. However, they need to gather more information about new entrants into their ‘normal’ market to ensure they invest with reliable managers.
3. Major disruptions
The hedge fund industry is built on disruption. The major geopolitical disruption of 2016 was China. The fall of energy prices also sent a tide through the entire financial sector, the hedge fund industry receiving a significant blow. The effects of these two disruptions are felt even today. There isn’t an accurate way of predicting potential disruptions. In 2017, geopolitical disruptions could be the U.K, U.S, Russia, Syria, or any other country.
Another major disruption that has started affecting the hedge fund industry is technology and digitalization. For a long time, the industry has somehow seemed as though it’s shielded from technology-led competition. Today, Artificial Intelligence has already developed roots in the industry. Regular operations such as trading and execution are slowly being automated. In future, we might see robots replacing human capital in such functions.
Change is happening in almost all facets of the hedge fund industry. Both managers and investors are being affected by the changes and it’s important for all players to brace themselves for what the future of hedge funds will offer.